A recent post on WFOE-formation over at the China Law Blog confirmed my view of some remarks that struck me as asinine when they were first reported last year: Coca-Cola CEO Muhtar Kent's statement that China had a more business-friendly environment than the United States. OK, if you're the CEO of a major multinational being wined and dined as you hobnob with senior leaders, maybe China looks pretty good. But is the Chinese economy really going to achieve sustainable development by catering just to the needs of major multinationals? How about the smaller enterprises that create employment and innovation? The difficulties faced by small and private companies in getting financing in China are well known; I won't go further into that issue here. But look at what's required (among other things) just to set up a wholly foreign-owned enterprise in China:

5. Lease on office space for the WFOE. The lease must be valid for at least one year beyond the eventual approval date for the WFOE. Since approval may take some time, it is best to have the initial term of the lease be at least one-and-a-half to two years. The lease must be in proper format and must be registered with the local real estate authority. We will also need proof that the landlord owns the property in question and has the authority to enter into the lease. This is usually proved by provision of a land rights certificate and proof of existence of the landlord (National ID for an individual, business license for a company). We will work with you during the leasing phase to ensure the lease is properly executed and that the landlord has proper authority. Prior to your entering into the lease, we will determine whether the proposed use is permitted for the premises and whether the proposed address is acceptable for a WFOE. Leases are often the biggest obstacle for WFOEs, so this is a matter to address right away. Note also that the specific details of the documentation requirements for a WFOE depend on the district where the WFOE will be formed. We therefore need to know the proposed address for the WFOE or at least the proposed district before we can make a final determination of the exact procedures that will be required for WFOE formation. Note also that we cannot even begin the registration process in China until we know the address of the proposed registered office for the WFOE, as well as the proposed use. This highlights the importance of the lease in the registration process.

6. We must specify the scope of business of the WFOE. Please provide a statement of what services the WFOE will perform on a daily basis. We need reasonable detail for this, but no more than one page. The scope of business should address the following questions, among others:

How many employees will be working there? Are they full-time or part-time? Will they be working in the leased space or off-site?

Will the number of employees vary over time?

What is the nationality of these employees?

What will each of these employees be doing in this rented space – will they be programming? consulting? buying? selling? manufacturing? providing customer support? managing other employees? something else?

Who are the customers of the business? That is, who will be paying for the services provided by the WFOE?

What is the projected cash flow of the business? Where will income go (i.e., to the WFOE, to the parent, to an affiliated entity)? How will expenses be paid (i.e., directly by the WFOE, by the parent, by an affiliated entity, etc.)? Where will the WFOE get its money to operate?

The scope of business will also be used in the company name as noted in Question 4. above.

No doubt some reasonable justification could be found for any particular one of these hoops to be jumped through, but when you put them all together (and remember, I'm just citing a few of them) one cannot avoid the feeling that the authorities view businesses as basically operations that are Up To No Good and that need to be carefully monitored and controlled. The idea that the future is unpredictable and that businesses should be able to adjust quickly to changing circumstances seems utterly alien to this regulatory model.

Note that the model also assumes that the bureaucrats reviewing information about, say, the number and duties of employees or the projected cash flow will have the expertise to use that information to make decisions that serve whatever government policy they are supposed to be implementing in their decision-making. Color me doubtful.

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Comments

One cannot generalize. It depends on the industry and whether your products and services are desperately needed by China at what time and place.

Posted by: Frankie Fook-lun Leung | Jul 26, 2012 4:09:33 PM

In doing business in China, there are a lot of hidden costs. In the US, what you see is what you got. If the business is highly regulated, such as banking, the costs involved are probably the same. However, in business which does not seem regulated, like retailing, china has a load of more rules and regulations which you may not heard of until caught.